Peter Brooke 00:00
Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 51 of 2022, and it's the last one of the year as we all head out on holiday. It's been a tough year in markets, so I'm excited to take a break, and I'm looking forward to a week's skiing in Austria.
Peter Brooke 00:18
Other good news, and this time for markets, is that 2023 will be a better year. The main driver of this optimistic statement is the change in the global cost of capital has already happened. There have been more than 280 rate hikes this year, which is more than one a working day. This in turn has resulted in financial assets repricing with global bond yields higher by 2%. When we look at our long-term real return expectations, they have improved across all asset classes over the last year. The era of TINA or "there is no alternative" has been replaced with one where there are opportunities to make a decent return. Therefore, better valuations will provide a cushion into this coming year.
Peter Brooke 01:05
bad news is that higher rates will cause a slowdown in global growth, as the economy feels the pain that financial markets have already predicted. Large parts of the world will be in recession, profits will be under pressure, and countries, companies, and households that have borrowed too much will suffer. We think this will be a particularly tough time for some of the bubbly property markets, like Australia, Canada, and the United Kingdom.
Peter Brooke 01:35
On the macro-economic front, the one ray of hope is China. The Chinese economy is already in deep recession, so it should be coming out as the rest of the world falters. A desynchronized world will mean opportunities for differentiation and investors can hunt for reopening trades. We are more favorably disposed to emerging markets than we have been for some time and have a number of interesting positions in our funds as a result. Adding to this view is our thinking that US dollar strength, a major theme in 2022, should peak and start to reverse in the coming year. The strong dollar has been a massive tailwind to US assets and threatens to become a headwind. Once again, we prefer non-US assets in the year ahead.
Peter Brooke 02:26
China reopening, better emerging markets, and a weaker US dollar should be an amazing environment for South Africa. However, our inability to generate electricity means we will not benefit, and South Africa will muddle along. Our assets remain very cheap, and our valuation work suggests real returns on South African bonds, equity, and property, of six, seven and seven and a half percent respectively. Unfortunately, we doubt such higher returns will be realized in 2023, as the global growth environment will remain tricky.
Peter Brooke 02:59
In our year ahead work, Jason Swartz led a session on risks. A positive risk is that inflation falls, which we expect, and the Fed cuts rates, which we don't expect. A third pivot will improve global liquidity and risk assets will deliver nicely. The other side of this is that higher rates for longer causes unexpected shocks. We're not currently seeing where these liquidity shocks will come from. But that's the point of them being unexpected, it doesn't mean that they're not there. As always, a well-balanced portfolio is required to protect against this uncertainty. In the meantime, enjoy your break, and good luck for 2023. Until next year.